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December 2, 2024 This article has been reviewed according to Science X's editorial process and policies . Editors have highlightedthe following attributes while ensuring the content's credibility: fact-checked trusted source proofread by Chris Mahony, City University London Ski resorts faced with falling visitor numbers due to climate change should hedge their income by taking out separate weather derivatives (insurance-like financial products) for each month of the season, academics suggest. As the new skiing season gets underway, milder European winters are leaving resorts in the Alps increasingly endangered by declining and unpredictable snow levels.
Weather derivatives allow businesses in energy, agriculture and tourism to 'sell' the risk of lost income due to weather events in return for paying a premium. They are traded 'over-the-counter' through brokers and via an exchange. Academics from Bayes Business School, City St George's University of London, analyzed snow depth and temperature data from an Austrian resort stretching back more than half a century to predict visitor numbers and revenues in a given month.
Mind the crevasses They concluded that the wide variation in visitor numbers at different points in the season suggests financial markets and winter tourism operators should agree weather derivative contracts that reflect peaks and troughs in historical average monthly revenues. Each month would effectively be covered by a different contract, with a different payout trigger, based on historic weather patterns and visitor numbers. They confirmed significant peaks and troughs of activity for ski resorts, including: Visitor numbers depend on snow depth and temperature.
As snow depth falls, companies become more heavily reliant on the traditionally busier days—such as Christmas Day and other public holidays, school holidays and weekends. Deep snow on the first day of a ski season reduces the dependence on those popular days—showing that snow depth and temperature consistency is important out of season as well. A single contract based on the cumulative snow level at the end of the season is highly risky for all parties and has the widest variation in profit and loss outcomes of all the options tested.
Co-authors Laura Ballotta, Professor of Mathematical Finance, and Ioannis Kyriakou, Professor of Actuarial Finance, said the research should encourage ski tourism companies to purchase weather derivatives and think more strategically about the risk involved. Professor Ballotta said, "Treatment of premises through artificial 'snowmaking' and landscaping is costly and could release potentially harmful additives into the environment. Diversifying activities beyond traditional ski and snow sports activities can also have expensive investment costs, so we believe that accessing financial markets for weather derivatives and sharing risk is the most viable option.
" Professor Kyriakou, who is Director of the MSc in Actuarial Science and the MSc in Actuarial Management, said, "Winter tourism is vital to Alpine regions, not just in terms of snow sport facilities, but also accommodation, catering, entertainment and retail opportunities that come with it. Higher temperatures are reducing snow levels each year, which could have major ramifications on tourism for an area that depends so heavily on the revenues it generates. "By using our methodology, which is based on more than 50 years' worth of snowfall and temperature data, companies can choose the best weather derivative contracts to protect themselves from financial ruin if hit by a particularly poor season.
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The study was based on 20,774 historic daily weather observations at Sonnblick, Austria, from the European Climate Assessment and assumed that the ski season runs from 1st December through to 15th April. While specific information on the percentage of ski resorts using weather derivatives is limited, the market for weather derivative instruments has grown significantly. The climate risk transfer derivatives market is worth over $25 billion—and that figure is expected to double in the near future.
Trading in weather derivatives is booming as investors fight to manage increasing risks from extreme weather events. The CME, a global derivatives marketplace, saw 'open interest' in weather futures and option products jump 275% last year—a trend that continued into 2024. Although there is little data on premia levels, growing recognition of the rising impact and frequency of extreme weather events means prices may well increase, Professor Kyriakou said.
Provided by City University London.
